New UK listing rules set to attract more state companies

Updated 17 July 2017
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New UK listing rules set to attract more state companies

LONDON: Proposed changes to Britain’s listing regime are likely to attract a series of state-backed companies to London’s stock markets as governments in oil-rich states prepare for a wave of asset sales.
However, some investors and corporate governance groups say Britain’s move to make its capital markets attractive to state-controlled firms by loosening some of the rules may lower the quality of companies on its stock exchange and leave shareholders with less protection when things go wrong.
The UK financial regulator proposed a new “premium” listing category for state-owned companies on Thursday, intended to make the market more attractive for oil giant Saudi Aramco as it plans what is expected to be the world’s largest ever initial public offering (IPO).
The move was applauded by Britain’s financial lobby groups as helping to make sure the country’s capital markets remain attractive once it leaves the EU.
Capital markets lawyers say that as well as Saudi Arabia, the changes will appeal to a number of countries that are also in the midst of asset privatization plans.
“This broadens the appeal of London for companies in countries like Saudi Arabia, Kazakhstan, Russia, and southern Europe,” Raj Karia, a partner at law firm Norton Rose, told Reuters. “There are a lot of companies globally which are state-owned and will be privatized and in the run up to Brexit, London is appealing to the world outside of Europe.”
Falling oil prices have spurred privatizations across the Middle East, with Saudi Arabia, Oman and Abu Dhabi all announcing plans in the past year to float some of their oil assets. Government asset sales are also expected from Romania and Greece.
Nicholas Holmes, a partner at law firm Ashurst, said it was clear the proposed rules were aimed at attracting further sovereign business in London beyond Aramco.
However, he cautioned that the changes risked undoing some reforms made to Britain’s listing rules in 2014 following a number of scandals.
London-listed mining companies Eurasian Natural Resources Corporation (ENRC) from Kazakhstan and Bumi from Indonesia both left minority investors nursing heavy losses, which were both blamed on dealings involving company insiders and controlling shareholders.
That led to the rule changes, with such companies forced to ensure that all transactions between a controlling shareholder or their associates and the company are conducted on an arm’s length basis and on normal commercial terms.
These rules will not apply to sovereign-controlled companies under the new proposed listing structure when dealing with the parent state, provided it holds at least 30 percent of the shares.
“The fear is that we are rolling back a portion of sensible reforms, which came as a result of past scandals such as ENRC. The risk is a dilution of the premium listing brand,” Ashurst’s Holmes said.
Shareholder groups and investors agreed.
“Our initial reaction is that investors and savers should be nervous about any dilution of existing protections which were specifically introduced to avoid a repetition of the governance issues associated with Bumi and ENRC,” said Catherine Howarth, chief executive of ShareAction.
Euan Stirling, head of Stewardship and ESG (environmental, social and governance) Investment at Standard Life, one of the biggest investors in the British stock market, said the move sent the wrong signal.
“We would prefer to see listing rules tightened rather than loosened,” he said.
Sources said Kazakh energy company KazMunaiGas is one of the most likely state-backed companies aside from Aramco to take advantage of Britain’s proposed new listing rules. It is currently selecting advisers for its planned 2019 IPO and is expected to consider London.
Kazakhstan is listed as number 131 out of 176 on the Transparency International corruption perception index. The company was not immediately available to comment.
Reeling from the collapse of its merger with Deutsche Bourse and a slowdown in large domestic listings, the London Stock Exchange (LSE) is targeting emerging markets, and the Middle East in particular, as a source of new IPOs.
Including Saudi Aramco, Riyadh aims to raise around $200 billion in the next several years through privatization programs in 16 sectors. Fighting a budget deficit, Kuwait is also considering privatizing some assets.
The UAE could raise $1.5 to $2 billion for Abu Dhabi’s national oil company. That is initially expected to be a local listing, which does not rule out the company tapping the London market in future.
With smaller deal sizes, Egypt plans to list shares in a state-owned bank and companies including Banque du Caire and Arab African International Bank.
Some of the large Middle East companies will be suitable for a listing in London, though some could opt for their local exchange.
Russian state-owned companies such as Gazprom and Rosneft are already on the LSE using the less popular standard listing structure, but will now find it easier to achieve the conditions for a premium listing.
For investors, the next step to watch will be whether any companies listed under the new rules will be eligible for including in any stock market indices, meaning they can raise funds from passive index-tracking funds.


Saudi stocks receive landmark emerging markets upgrade from MSCI

Updated 21 June 2018
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Saudi stocks receive landmark emerging markets upgrade from MSCI

  • Market authorities in Saudi Arabia have introduced a series of reforms in the past 18 months
  • MSCI’s Emerging Market index is tracked by about $2 trillion in active and global funds

LONDON: Saudi Arabian equites are poised to attract up to $40 billion worth of foreign inflows, following a landmark decision by index provider MSCI to include the Kingdom’s stocks in its widely tracked Emerging Markets index.

"MSCI will include the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index, representing on a pro forma basis a weight of approximately 2.6% of the index with 32 securities, following a two-step inclusion process," the MSCI said in a statement late on Wednesday night Riyadh time.

“Saudi Arabia’s inclusion in MSCI’s EM Index is a milestone achievement and will likely bring with it significant levels of foreign investment,” Salah Shamma, head of investment for MENA at Franklin Templeton Emerging Markets Equity, told Arab News. 

“It is a recognition of the progress Saudi Arabia has made in implementing its ambitious capital markets transformation agenda. The halo effect of such a move will be felt across the stock exchanges of the entire Gulf Cooperation Council (GCC).”

Market authorities in Saudi Arabia have introduced a series of reforms in the past 18 months to bring local capital markets more in line with international norms, including lower restrictions on international investors, and the introduction of short-selling and T+2 settlement cycles.

Such reforms prompted index provider FTSE Russell to upgrade the Kingdom to emerging market status in March, opening the country’s stocks up to billions worth of passive and active inflows from foreign investors.

MSCI’s Emerging Market index is tracked by about $2 trillion in active and global funds. The inclusion of Saudi stocks in the index, alongside FTSE Russell’s upgrade, is forecast to attract as much as $45 billion of foreign inflows from passive and active investors, according to estimates from Egyptian investment bank EFG Hermes. 

The upgrade announcement was widely expected by the region’s investment community, following a similar emerging markets upgrade announcement by fellow index provider FTSE Russell in March. 

“MSCI index inclusion will be a historic milestone for the Saudi market as it will allow for sticky institutional money to make an entry in 2019 which will help deepen the market,” said John Sfakianakis, director of economic research at the Gulf Research Center in Riyadh.